The benefits and costs of internal markets

There has been substantial research documenting the pattern of diversification among firms in the United States, e.g. Fan and Lang (2000). The evidence indicates that such diversification reduces firm value (Lang and Stulz 1994; Berger and Ofek 1995; Comment and Jarrell 1995; Servaes 1996, among others). The value discount has been attributed to poor resource allocation as diversified firms allocate capital to less profitable segments and increase risks. The question arises as to why corporations diversify.